1A:

The city of Chambana has a large number of video poker arcades. The demand by patrons for the games (in thousands per week) is Q_d = 180 - 2P and the supply is Q_s = P - 30 where P is the price in cents charged to play a game. (Note: Please be careful and consistent with your units of measurement.)

• What is the equilibrium number (quantity) of games played? 40
• What is the equilibrium price? 70
• Draw a diagram depicting the equilibrium in this market.

1B:

Continue your analysis of the video poker market in Chambana: demand by patrons for the games (in thousands per week) is Q_d = 180 - 2P and the supply is Q_s = P - 30 where P is the price in cents charged to play a game.

Now suppose that the city of Chambana passes a new law which requires that all video poker arcades contribute mcents to a city charitable fund for each game played on their machines. This is, essentially, an excise tax.

• In a new diagram, show the effect of the new law on the market and explain this effect. (Do not try to give an algebraic solution; just show what happens graphically and provide a description. Please be sure to illustrate how the tax of m cents shifts a specific curve, consistent with the approach we've taken in this course in modeling taxes and subsidies. Clearly indicate the distance by which the curve has shifted. Recall that the direction of the shift carries a specific meaning in economics for depicting taxation/subsidies.)
• Graphically indicate the incidence of taxation on consumers as well as arcade owners (producers). Do not attempt to quantify the incidence of taxation.
• Explain what incidence of taxation is and what your graph tells you about the incidence of taxation in this case. (Suggested response volume: 1 to 2 paragraphs).